 Gold & interest
rates move together
Mary Anne & Pamela Aden
The Aden Sisters
August 12, 2004
Courtesy
of www.adenforecast.com
RECORD OIL: Bullish for
gold
The oil price keeps hitting new record highs. High oil prices
reflect two things. The enormous appetite the world has for oil,
especially with China adding to the demand side since it's now
the second largest consumer of oil after the U.S. The second
factor is the supply side. Any act that might disrupt or limit
the oil supply causes the oil price to rise. That's what recently
happened when Yukos, Russia's largest oil exporter, was ordered
to halt production. Plus, oil disruptions in Iraq have added
more fuel to the fire.
It all boils down to uncertainty.
As long as we have uncertainty in the supply or demand side,
we'll continue to see higher oil prices. And since the oil price
strongly affects inflation, this means inflation is headed higher
too. This in turn will be good for gold since gold is the maximum
inflation hedge.
INFLATION ALREADY
PICKING UP
Keep in mind, even though inflation slowed this month, consumer
prices have increased at the fastest rate in 13 years in the
past six months. Import prices are up nearly 9% annualized in
the first half of 2004, which is the most in 16 years. And with
the oil price currently at record highs, this will continue in
the months ahead.
Meanwhile, we know Bush has
been spending massive amounts for defense and the war on terror.
This has resulted in huge deficits and unprecedented government
spending, which has helped boost the economy following the bursting
of the stock market bubble in 2000. To put this into perspective,
Marc Faber points out that the amount of money issued from 2000
through 2003 exceeded the entire amount of currency printed in
U.S. history from George Washington to 1980. That's another good
reason why we're now seeing inflation.
But deflation pressures also
persist. The bubble never really deflated as it normally would.
All that money has kept things rolling and the bubble has shifted
from stocks to real estate, thanks also to super low interest
rates. But consumers are heavily in debt and they have little
savings. Their savings is in their homes, which is fine as long
as real estate prices hold up. The economy, however, has underlying,
fundamental problems and if Kerry wins the election and reduces
spending, which is possible, it would be like closing the bar
as the party's getting underway and the economy could then slow
quicker than most expect since it's grown dependent on all this
stimulus.
INTEREST RATES: Also
headed higher
If interest rates are rising even moderately at the same time,
it would also hurt real estate prices and consumer spending.
Already, the first small hike in interest rates turned the stock
market bearish and it's begun to slow the fragile economy. Nevertheless,
interest rates are going higher due to current inflation pressures,
which is a greater concern than deflation.
Note the T-Bill interest rate
has now risen above its 65-week moving average for the first
time in over three years (see Chart 1). This confirms
the major interest rate trend has now turned up and rates are
going higher in the months and likely years ahead.
chart
1
GOLD & INTEREST
RATES MOVE TOGETHER
Popular Wall Street wisdom has it that gold would become unattractive
if interest rates rise. The reason being, gold doesn't pay interest
and it wouldn't be able to compete with the higher yielding dollar,
which would be in greater demand and move higher as interest
rates rise, pushing gold down.
Well, let's set the record
straight Rising interest rates are NOT bearish for gold and they
never have been. On the contrary, so even if interest rates keep
rising, it's unlikely to affect gold in a negative way.
Chart 2 shows the historical record. As you
can see going back to 1970, which was shortly after gold began
trading in the free market (the price was fixed prior to that),
gold and interest rates have moved up together. In some cases,
gold led the way up and interest rates followed because inflation
was usually also rising, especially in the 1970s.
chart 2
At that time, inflation soared
and so did interest rates, with some rates peaking near 20% in
1980. Since gold is very sensitive to inflation, it soared too,
reaching its peak in 1980 near $850. So if anyone says rising
rates would be bad for gold, they don't understand this historical
relationship and that's even more important now that inflation's
picking up and the U.S. dollar remains bearish.
GOLD'S BULLISH STEPS
INTACT
From a technical viewpoint, gold is a cyclical and seasonal market
and it moves in what we call steps. Chart 3 shows these
steps since 1980 and it helps put the overall action in perspective.
chart 3
Gold moves in a 1 through 4
movement and depending on these movements, it will determine
the strength or lack of strength a bull market has. The number
1 rises are the best bull market rises and the #4 declines are
the worst bear market declines. Since gold's major peak in 1980,
the steps were down for over 20 years because the best bull market
rises were unimpressive (see #1). These rises failed to rise
above the prior peaks (see #3) like they did in the 1970s.
But the steps changed in 2001
because gold didn't fall to a new low when it formed its #4 low
as it had before. This was the first change in the over 20 year
pattern and it coincided with the 8 year cycle low area. Gold
then closed above its 65-week moving average where it has stayed
since then. From there, the #1 rise began (best bull market rise)
and gold soared above its prior #3 peak in December 2002, again
for the first time in over 20 years. This was a milestone because
gold rose into the second step of the bull market and the 1996
high then became the next target level (see horizontal line).
Gold completed this target last January and again in April.
Since April, gold has stayed
near the upper side of this bullish second step and above its
65-week moving average, which shows good strength. On the upside,
if gold breaks clearly above $430, it'll be another milestone
because it'll be breaking above the prior #1 peak and it'll be
entering the third bullish step where the 1987 high near $500
would then be the next target. This could happen later this year
assuming the bull market stays intact.
For now, we're watching the
all important 65-week moving average at $385 since it identifies
the major trend and gold will remain bullish above that level.
Aug 11, 2004
Mary Anne & Pamela Aden
The Aden Forecast
Mary Anne
& Pamela Aden are internationally known analysts and editors
of The Aden Forecast, a market newsletter providing specific
forecasts on gold, gold shares and the other major markets.
For more
information, go to http://www.adenforecast.com/
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321gold Inc Miami USA
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